nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒02‒15
twenty papers chosen by
Martin Berka
University of Auckland

  1. Exchange Rates and Consumer Prices: Evidence from Brexit By Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
  2. International Risk Sharing with Heterogeneous Firms By Masashige Hamano
  3. Rising protectionism and global value chains: quantifying the general equilibrium effects By Cappariello, Rita; Franco-Bedoya, Sebastian; Gunnella, Vanessa; Ottaviano, Gianmarco I. P.
  4. International friends and enemies By Benny Kleinman; Ernest Liu; Stephen J. Redding
  5. Market Regulation, Cycles and Growth in a Monetary Union By Mirko Abbritti; Sebastian Weber
  6. Who did it? A European Detective Story Was it Real, Financial, Monetary and/or Institutional: Tracking Growth in the Euro Area with an Atheoretical Tool By Mariarosaria Comunale; Francesco Paolo Mongelli
  7. Manufacturing Risk-Free Government Debt By Jiang, Zhengyang; Lustig, Hanno; Van Nieuwerburgh, Stijn; Xiaolan, Mindy Z.
  8. Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect By Patrick Blagrave
  9. Managing global production: theory and evidence from just-in-time supply chains By Pisch, Frank
  10. COVID-19 and Global Income Inequality By Angus Deaton
  11. Financial Globalization and Inequality: Capital Flows as a Two-Edged Sword By Barry J. Eichengreen; Balazs Csonto; Asmaa A ElGanainy; Zsoka Koczan
  12. International Public Capital Flows By Hung Ly Dai
  13. Can Destination-Based Cash Flow Taxes Arise in Equilibrium? By Thomas A. Gresik; Eric Bond
  14. Is the COVID-19 crisis an opportunity to boost the euro as a global currency? By Grégory Claeys; Guntram B. Wolff
  15. Domestic Amplifiers of External Shocks: Growth Accelerations and Reversals in Emerging Market and Developing Economies By Bertrand Gruss; Malhar S Nabar; Marcos Poplawski Ribeiro
  16. Does the Rise of China Lead to the Fall of European Welfare States? By Barth, Erling; Finseraas, Henning; Kjelsrud, Anders; Moene, Karl Ove
  17. Bank Balance Sheets and External Shocks in Asia: The Role of FXI, MPMs and CFMs By Zefeng Chen; Sanaa Nadeem; Shanaka J Peiris
  18. Trade, productivity and (mis)allocation By Antoine Berthou; John Jong-Hyun Chung; Kalina Manova; Charlotte Sandoz Dit Bragard
  19. International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending By Sangyup Choi; Davide Furceri; Chansik Yoon
  20. Current account imbalances: Exploring role of domestic and external factors for large emerging markets By Krittika Banerjee; Ashima Goyal

  1. By: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit, exchange rate pass-through, import costs, inflation
    JEL: E31 F15 F31
    Date: 2019–12
  2. By: Masashige Hamano (Waseda University, School of Political Science and Economics and CREA research fellow)
    Abstract: Little is known about the consequence of firm heterogeneity and its resulting reallocation effect on international consumption risk sharing. This paper explores international risk sharing in a theoretical model with firm heterogeneity and shows that firm heterogeneity changes the nature of international risk sharing, thus driving a wedge between relative consumption growth and real exchange rate fluctuations. A correlation is found to be conditional on the fluctuations in the number of product varieties and their qualities arising from the reallocation effect induced by heterogeneous firms; the conventional unconditional correlation can be thus biased. Using world trade data covering more than two decades, I note the existence of bias and find that the extent of international risk sharing is underestimated. The analysis indicates a larger welfare gain from international trade than we have been measuring.
    Keywords: exchange rate; international risk sharing; product quality; firm heterogeneity
    JEL: F12 F41 F43
    Date: 2019–06
  3. By: Cappariello, Rita; Franco-Bedoya, Sebastian; Gunnella, Vanessa; Ottaviano, Gianmarco I. P.
    Abstract: Quantifying the effects of trade policy in the age of ’global value chains’ (GVCs) requires an enhanced analytical framework that takes the observed international input-output relations in due account. However, existing quantitative general equilibrium models generally assume that industrylevel bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This amounts to applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in available inputoutput data sets. To overcome this limitation of existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in inputoutput tables. This allows us to investigate the relation between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies.
    Keywords: trade model; supply chains; trade policy shocks; Brexit
    JEL: F13 F15 F40
    Date: 2020–03
  4. By: Benny Kleinman; Ernest Liu; Stephen J. Redding
    Abstract: We develop sufficient statistics of countries' bilateral income and welfare exposure to foreign productivity shocks that are exact for small shocks in the class of models with a constant trade elasticity. For large shocks, we characterize the quality of the approximation, and show it to be almost exact. We compute these sufficient statistics for over 140 countries from 1970-2012. We show that our exposure measures depend on market-size, cross-substitution and cost of living effects. As countries become greater economic friends in terms of welfare exposure, they become greater political friends in terms of United Nations voting and strategic rivalries.
    Keywords: productivity growth, trade, welfare
    JEL: F14 F15 F50
    Date: 2020–07
  5. By: Mirko Abbritti; Sebastian Weber
    Abstract: We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.
    Keywords: Total factor productivity;Return on investment;Labor markets;Commodity markets;Inflation;WP,labor market
    Date: 2019–06–03
  6. By: Mariarosaria Comunale (Bank of Lithuania & the Australian National University); Francesco Paolo Mongelli (European Central Bank)
    Abstract: During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.
    Keywords: euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, and synchronization
    JEL: C23 E40 F33 F43
    Date: 2020–05–11
  7. By: Jiang, Zhengyang (Northwestern U); Lustig, Hanno (Stanford U); Van Nieuwerburgh, Stijn (Columbia U); Xiaolan, Mindy Z. (U of Texas at Austin)
    Abstract: Governments face a trade-off between insuring bondholders and taxpayers. If the government decides to fully insure bondholders by manufacturing risk-free debt, then it cannot insure taxpayers against permanent macro-economic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government insures taxpayers against adverse macro shocks, then the debt becomes at least as risky as unlevered equity. Only when government debt earns convenience yields, may governments be able to insure both bondholders and taxpayers, and then only if the convenience yields are sufficiently counter-cyclical.
    Date: 2020–08
  8. By: Patrick Blagrave
    Abstract: Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
    Keywords: Inflation;Trade integration;Nominal effective exchange rate;Food prices;WP,moving average,Core CPI Inflation,dependent variable
    Date: 2019–07–11
  9. By: Pisch, Frank
    Abstract: Revised August 2020. Global value chains are highly fragmented across countries and dominated by a few large multinational firms. But the challenges of an increasingly difficult international business environment are raising the question of how these patterns will change. I study the role of international Just-in-Time (JIT) supply chains in how global production is organized and what the future may hold. Using survey and administrative data for a large panel of French manufacturers, I first document that JIT is widespread across all industries and accounts for roughly two thirds of aggregate employment and trade. Next, I establish two novel stylized facts about the structure of international JIT supply chains: (1) They are more concentrated in space and (2) more vertically integrated than their ‘traditional’ counterparts. I rationalize these patterns in a framework of sequential production where failure to coordinate adaptation decisions in an uncertain environment leads to inventory holding. In JIT supply chains, information about downstream demand conditions is relayed upstream, which facilitates coordination. The associated inventory saving effect is stronger when firms are close to each other, so that the supply chain reacts quickly to changes in demand. This also applies when they are part of the same company and incentives for adaptation are aligned. I validate this model by supporting empirical evidence for further predictions and discuss potential long term implications of Brexit and COVID-19 for the structure of international supply chains.
    Keywords: just-in-time; global value chains; multinational firms; vertical integration
    JEL: F10 F14 F23 D23 L23
    Date: 2020–04
  10. By: Angus Deaton
    Abstract: There is a widespread belief that the COVID-19 pandemic has increased global income inequality, reducing per capita incomes by more in poor countries than in rich. This supposition is reasonable but false. Rich countries have experienced more deaths per head than have poor countries; their better health systems, higher incomes, more capable governments and better preparedness notwithstanding. The US did worse than some rich countries, but better than several others. Countries with more deaths saw larger declines in income. There was thus not only no trade-off between lives and income; fewer deaths meant more income. As a result, per capita incomes fell by more in higher-income countries. Country by country, international income inequality decreased. When countries are weighted by population, international income inequality increased, not because the poorest countries diverged from the richest countries, but because China—no longer a poor country—had few deaths and positive economic growth, pulling it away from poor countries. That these findings are a result of the pandemic is supported by comparing global inequality using IMF forecasts in October 2019 and October 2020.
    JEL: F01 I14 O11
    Date: 2021–01
  11. By: Barry J. Eichengreen; Balazs Csonto; Asmaa A ElGanainy; Zsoka Koczan
    Abstract: We review the debate on the association of financial globalization with inequality. We show that the within-country distributional impact of capital account liberalization is context specific and that different types of flows have different distributional effects. Their overall impact depends on the composition of capital flows, their interaction, and on broader economic and institutional conditions. A comprehensive set of policies – macroeconomic, financial and labor- and product-market specific – is important for facilitating wider sharing of the benefits of financial globalization.
    Date: 2021–01–08
  12. By: Hung Ly Dai (Vietnam Central Economic Commission, Hanoi, Vietnam)
    Abstract: We analyze the international public capital flows by exploring the sovereign debt rating, a proxy for the safety of safe assets, on a crosssection sample of 132 advanced and developing economies. A higher sovereign debt rating is associated with less net public capital inflows, which are attributed to the decrease of grants inflows, net official debts inflows and IMF credit flows. Moreover, a higher productivity growth rate is associated with more foreign reserves for low sovereign debt rating but with less foreign reserves for high sovereign debt rating. Therefore, the net public capital inflows, especially the foreign reserves, builds up a buffer stock for the economy with low sovereign debt rating to insure against future uncertainty. The result is robust for instrument variable (IV) regression.
    Keywords: Public Capital Flows,Sovereign Debt Rating,Productivity Growth,Allocation Puzzle,Instrument Variable Regression
    Date: 2020–06
  13. By: Thomas A. Gresik; Eric Bond
    Abstract: We examine the effects of unilateral changes in a country’s tax parameters in a two country model when both countries are part of a destination-based cash flow taxation (DBCFT) system. We con-sider deviations from a globally efficient DBCFT equilibrium by allowing each country to vary its corporate tax rate, degree of taxation of capital income, and level of border adjustment. We decompose the effect of policy changes into fiscal effects and price effects, and show that regardless of the similarity between the two countries, at least one country has an incentive to move toward taxation of capital income. If countries are identical, each has an incentive to move toward source-based taxation. In contrast, changes in corporate tax rates have neither fiscal or price effects, and thus can be set unilaterally. Our results show that an international agreement to establish multilateral DBCFT requires a commitment mechanism to prevent deviations from cash flow taxation and full border adjustments.
    Keywords: destination-based taxes, source-based taxes, cash-flow taxes
    JEL: H73 H21 F23
    Date: 2021
  14. By: Grégory Claeys; Guntram B. Wolff
    Abstract: This note was prepared at the request and with the financial support of the Croatian Presidency of the Council of the European Union, as a background paper for discussion at the informal ECOFIN in Zagreb, which was cancelled because of the COVID-19 outbreak and implementation of containment measures. • The euro became an international currency when it was created two decades ago. However, the euro's internationalisation peaked as early as...
    Date: 2020–06
  15. By: Bertrand Gruss; Malhar S Nabar; Marcos Poplawski Ribeiro
    Abstract: External conditions have been found to influence the tendency of emerging market and developing economies to experience episodes of growth accelerations and reversals. In this paper we study the role of domestic policies and other structural attributes in amplifying or mitigating the effect that shifts in external conditions have on growth patterns in emerging market and developing economies over the past five decades. We find that these economies can enhance the growth impulse from external conditions by strengthening their institutional frameworks and adopting a policy mix that protects trade integration; permits exchange rate flexibility; and ensures that vulnerabilities stemming from high current account deficits and external debt, as well as high public debt, are contained.
    Keywords: Exchange rate flexibility;External debt;Public debt;Capital account;Current account balance;WP,domestic policy,terms of trade
    Date: 2019–06–17
  16. By: Barth, Erling (Institute for Social Research, Oslo); Finseraas, Henning (Norwegian University of Science and Technology (NTNU)); Kjelsrud, Anders (University of Oslo); Moene, Karl Ove (University of Oslo)
    Abstract: Have recent trends in globalization changed the positive link between trade openness and social insurance? The consensus view - that voters want better social insurance against income loss the more open the economy - is seemingly contested by the rise of populism and the China shock. We present a theoretical framework of risk and income effects of globalization that captures the conventional view, but also shows when it will be modified: When the income effect is negative, the political support for social insurance can decline in spite of the risk effect. We construct an empirical measure of welfare state support across European regions and leverage the rapid integration of China into the world economy to show that higher import competition reduces the support for social insurance. Consistent with our framework, we decompose the overall effect of the shock into a (weak) positive risk effect and a (strong) negative income effect.
    Keywords: regional labor demand, welfare state support, social insurance, China shock, trade exposure
    JEL: J21 J23 H55 F16 F6
    Date: 2021–01
  17. By: Zefeng Chen; Sanaa Nadeem; Shanaka J Peiris
    Abstract: In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).
    Date: 2021–01–15
  18. By: Antoine Berthou; John Jong-Hyun Chung; Kalina Manova; Charlotte Sandoz Dit Bragard
    Abstract: We examine the gains from globalization in the presence of firm heterogeneity and potential resource misallocation. We show theoretically that without distortions, bilateral and export liberalizations increase aggregate welfare and productivity, while import liberalization has ambiguous effects. Resource misallocation can either amplify, dampen or reverse the gains from trade. Using model-consistent measures and unique new data on 14 European countries and 20 industries in 1998-2011, we empirically establish that exogenous shocks to export demand and import competition both generate large aggregate productivity gains. Guided by theory, we provide evidence consistent with these effects operating through reallocations across firms in the presence of distortions: (i) Both export and import expansion increase average firm productivity, but the former also shifts activity towards more productive firms, while the latter acts in reverse. (ii) Both export and import exposure raise the productivity threshold for survival, but this cut-off is not a sufficient statistic for aggregate productivity. (iii) Efficient institutions, factor and product markets amplify the gains from import competition but dampen those from export access.
    Keywords: international trade, export demand, import competition, productivity, allocative efficiency, misallocation
    JEL: F10 F14 F43 F62 O24 O40 O47
    Date: 2020–01
  19. By: Sangyup Choi; Davide Furceri; Chansik Yoon
    Abstract: This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.
    Keywords: Cross-border banking;Bank credit;Fiscal stimulus;Expenditure;Spillovers;WP,bank lending,government spending,exchange rate,monetary policy
    Date: 2019–07–12
  20. By: Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Global trade imbalances have been a focal point of discussion in international economics literature but opinions remain highly divided with respect to its origin. This paper studies the impact of relative financial development and governance institutions of key large emerging market economies (EMEs) on their current account balances (CAB) defined as surpluses vis-a-vis impact from uncertainty in foreign capital flows over 1995-2018. Changing dynamics of global imbalances, that underwent significant structural changes around the years 2000 and 2008 (Global Financial Crisis), is also studied. Panel instrumental variable (Anderson-Hsiao, 1981) estimation is used to account for endogeneity from institutions. Results show that EMEs with higher financial development as well as better governance institutions accumulate significantly lesser surpluses. This supports the hypothesis of excess precautionary savings from lack of institutions. Democratic accountability emerges as a dominant factor throughout the entire period of analysis and also yielded the highest impact on CAB during pre-2008 years. Government stability and anti-corruption measures along with financial development influenced CAB only after 2000. While surpluses are reduced with better institutions, they are, however, increased significantly with higher uncertainty in the external sector as well as with higher independence from natural resource exports. EME surpluses were increased significantly with increased volatility in net flows in overall and portfolio equity capital respectively in 2001-08 and post-2008 period, the latter showing the higher impact on portfolio flows to EMEs during unconventional monetary policy years. Results indicate that during post-2008 years significant rebalancing in EME surpluses occurred due to less intervention accompanied with lower growth and developing institutions. Policy implications follow: EMEs institutions are important instruments in correcting global imbalances, while AE policies should also take into account repercussions on EMEs through the financial and external sectors.
    Keywords: Current account, Global imbalances, Governance, Capital flows, Precautionary savings, Uncertainty, Anderson-Hsiao method
    JEL: F42 F14 F32
    Date: 2021–01

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